With an agreement on extending Greece’s bail-out programme all but agreed by last Friday, eurozone periphery bonds enjoyed the full effects of the European Central Bank’s imminent quantitative easing programme. The market was strong through the week as the final touches to the Greek settlement were put in place but, on Thursday, a day after Spain’s deal, bankers’ screens were seas of green.
“There was a real sense on this deal that this was a pre-QE opportunity to buy some decent blocks of paper,” said a head of SSA syndicate at one of Spain’s leads, which were Barclays, BBVA, BNP Paribas, Citi, Société Générale and Santander.
Sentiment from the Rhine to the Atlantic was strong. Germany’s 10 year yield fell to a record low of just under 0.3% and Portugal’s equivalent borrowing cost fell below 2% for the first time on Thursday.
Through the week, Italy and Portugal hit record low yields at bond auctions, while Spain sold three month bills with just a 10th of a basis point of yield on Tuesday.
Spain’s curve also performed following its deal being priced on Wednesday.
“The yield at which we issued was 1.981% and I see it on Thursday morning at 1.835%,” said Pablo de Ramón-Laca Clausen, head of funding at the Spanish Treasury.
“There’s a very significant rally occurring throughout the curve, and I believe that the size and success of this deal may have had something to do with it.”
Double record breaker
Spain priced Wednesday’s €7bn July 2030 at 100bp over mid-swaps, at the tight end of guidance of 102bp area and initial price thoughts of 105bp area.
The spread equated to a yield of 1.981%, 321bp below that of Spain’s last 15 year syndication, a €3.5bn October 2028 in July 2013.
The 1.95% coupon on the deal was a record low for a Spanish 15 year, while the size was a record high.
“To do this sort of size is a good comment on the positioning of Spain as a credit and the coming of age for the 15 year maturity for them in particular,” said Lee Cumbes, head of SSAR DCM, EMEA at Barclays.
“Beyond 10 years it is a different sort of market, more credit intensive, with usually fewer investors involved and a different makeup. The fact that the Spanish recovery story has been good, even beyond recent positive forecasts, all helps people get involved in this longer term investment. In this kind of low rate market, 15 years becomes more attractive as a benchmark maturity for investors.”
The deal hit screens on Tuesday afternoon but the leads waited until Wednesday morning before posting initial price thoughts.
“The mandate announcement a day earlier is more to get attention and say a deal’s coming, for investors to check their credit lines and prepare to get involved,” said Bernd Loder, director, European syndicate at Barclays.
“There’s no need to discuss pricing at that early stage and the stability of spreads after the announcement showed the market was confident about where it should price.”
Demand from outside Spain was strong, with 73% of the paper going across border . The final book was €20.151bn, with 460 investors involved and €1.5bn of lead interest.
The strength of the book build was unsurprising given the ECB will launch QE next month, along with other factors, said SSA bankers away from the deal.
“[ECB president Mario] Draghi has his bazooka coming up in early March [and] the initial price thoughts offered 10bp of premium over fair value. It has a nice yield, so it has the full recipe for success,” said a head of SSA DCM. “I was not concerned about this deal.”
Bankers away from the mandate applauded the deal, although one — who called it "awesome” — said the initial price thoughts were “a little cheap, but if the plan was to get size then that’s fine”.
He added: “They didn’t push through 100bp — Spain is a very good example of a good issuer that doesn’t try to squeeze everything out of a deal.”
Syndicate officials on the deal said there had been no push back from investors when tightening the price.
